More financial experts are offering advice on how to get ready for the impending recession, including how much money you should probably set aside.
The S had a tumultuous six months ending at the end of June.
Although the future is uncertain, Americans’ confidence in the economy has been undermined by supply chain shortages, rising inflation, stock market volatility, and geopolitical unrest.
Many are worried about not having enough money: according to Bankrate, nearly one-third of Americans have less than three months’ worth of savings, and nearly one-quarter have no emergency fund.
While years of historically low returns have made cash less appealing, rising interest rates may be about to change that. Additionally, experts claim that the peace of mind that savings provide has value.
Financial advisors have determined how much cash savings you’ll need at different stages of your career.
The question of whether to hold cash during a recession is a complex one, with no easy answer. While some experts recommend holding onto cash to weather the storm others argue that investing in assets with the potential for higher returns is a better long-term strategy.
This article delves into the pros and cons of holding cash during a recession exploring the potential benefits and risks involved. We’ll also examine alternative investment options that may be suitable for recessionary periods.
Pros of Holding Cash During a Recession
- Security: Cash is the most liquid asset, meaning it can be easily converted into other assets or used to pay expenses. This provides a sense of security and flexibility during uncertain economic times.
- Opportunity: Holding cash allows you to take advantage of investment opportunities that may arise during a recession. When asset prices fall, investors have the chance to buy stocks, bonds, or real estate at a discount.
- Debt Repayment: Recessions can be a good time to pay down debt, especially high-interest debt. By using cash to reduce your debt burden, you can save money on interest payments and improve your financial health.
- Emergency Fund: A recession can increase the risk of job loss or unexpected expenses. Having a cash emergency fund can provide peace of mind and help you cover essential costs during difficult times.
Cons of Holding Cash During a Recession
- Inflation Risk: Inflation erodes the purchasing power of cash over time. This means that the same amount of cash will buy less in the future than it does today. During periods of high inflation, holding cash can be a losing proposition.
- Missed Investment Opportunities: While holding cash allows you to capitalize on potential investment opportunities, it also means missing out on potential gains from other assets. The stock market has historically recovered from recessions, and investors who hold cash may miss out on these rebounds.
- Low Returns: Cash typically offers low returns compared to other assets. During a recession, interest rates may fall even further, reducing the potential return on cash investments.
Alternative Investment Options During a Recession
- Treasury Bills: Treasury bills are short-term government bonds that offer a relatively safe haven during economic downturns. They typically offer higher returns than cash and are considered a low-risk investment.
- Series I Savings Bonds: Series I Savings Bonds are issued by the U.S. Treasury and offer an interest rate that adjusts for inflation. This makes them an attractive option during periods of high inflation, as your investment will keep pace with rising prices.
- Gold: Gold is often seen as a safe-haven asset during times of economic uncertainty. While its price can fluctuate, gold has historically held its value during recessions.
- Dividend-paying Stocks: Companies with a strong track record of paying dividends can provide a steady stream of income during a recession. Investing in these companies can help mitigate the impact of falling stock prices and provide some downside protection.
The decision of whether to hold cash during a recession is a personal one, depending on your individual financial situation, risk tolerance, and investment goals. While cash offers security and flexibility, it may also result in missed investment opportunities and the erosion of purchasing power due to inflation.
Consider your individual circumstances and explore alternative investment options that may be suitable for your risk tolerance and financial goals. Remember, diversification is key to managing risk and achieving long-term financial success.
Although we cannot guarantee that the information in our articles, interactive tools, and hypothetical examples is accurate or applicable to your particular situation, they do contain information to assist you in conducting research. Any projections derived from historical performance are not a guarantee of future results. You should consult with a qualified professional or discuss your unique investment needs before making any decisions.
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Single earners: Put aside 6 months or more
However, according to Lyman, households headed by a single earner might gain from increasing savings to cover six to nine months’ worth of expenses.
Certain advisors advise singles and couples with two incomes to have larger cash reserves to give them “more options” and more flexibility in the event of a job loss. Recessions are usually accompanied by higher rates of unemployment, and it might take some time to find new employment.
A CFP and wealth advisor at Green Bee Advisory in Winchester, Massachusetts, Catherine Valega advises holding 12 to 24 months’ worth of cash on hand.
Best-selling author and personal finance expert Suze Orman has advocated for additional savings and recently told CNBC that she pushes for eight to twelve months’ worth of expenses. She stated, “If you want to leave your job or lose your job, that gives you the freedom to keep paying your bills while you figure out what you want to do with your life.”
How Should You Handle Your Money During a Recession?
FAQ
Is cash good in recession?
Where is your money safest during a recession?
How much cash should I have on hand during a recession?
Should you hold cash during a recession?
As a consumer and investor, cash seems like a safe investment. And, nominally, that’s true: holding cash means the value of your account won’t suddenly plummet. But relying too heavily on cash can detract from your ability to meet your long-term goals. To wit, let’s examine seven pros and seven cons of holding cash during a recession.
How can I save money during a recession?
And having cash handy is vital during a recession in case of a job loss or other reduction in income. And as rates rise your cash will earn more money in a savings account. Reduce debt: If you have high-interest debt, pay it down if you can. But don’t tap your emergency fund.
What happens to your money during a recession?
The good news is that since the rate of inflation slows during a recession, the value of your money either stays the same or slightly increases, which means your purchasing power improves. For your savings, that means the value of your cash is greater than when there’s high inflation.
Should you invest in cash or cash equivalents during a recession?
During a recession, investing in cash and cash equivalents becomes a strategic choice for investors who are hoping to preserve their capital and maintain liquidity. Cash equivalents include short-term, highly liquid assets with minimal risk, such as Treasury bills, money market funds and certificates of deposit.